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Economics of Adam Smith and David Ricardo

by Rit Nosotro

Comparative Essay

Compare and contrast the economic theories of Adam Smith and David Ricardo.

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Thesis:

Summary:

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What are economic theories? Which one works better? Who invented the most successful one? And most importantly, which would be more pleasing to God? Some would say that working with economic theories is distracting, and leads good Christians astray by tempting them to care more about money than their spirit. However, the Bible says, “be as innocent as doves, yet as wise as serpents.” (Matt 10:16) So, while economics can be distracting, if one keeps God in mind, and reads his Bible regularly, he can avoid temptation and ruin. To answer the previous questions, let’s examine two of the most famous economists in history: Adam Smith and David Ricardo. Each had very interesting backgrounds; Smith was born in Scotland and raised by his mother in Kircaldy. He attended Balliol College at Oxford to study theology with the intent of becoming a clergyman. However, he changed his mind and lectured on law and rhetoric, as well as taught logic at the University of Glasgow. Eventually, he was hired to tutor the son of the Rt. Honorable Charles Townsend, and toured Europe with the family. While in Toulouse, France for a tedious whole year, he learned about the French Physiocrats’ theory of economics, which lead him to write his most famous work, The Wealth of Nations. His book and theory were instant successes, and have been ever since the first publication in 1776 (the year of the American Revolution). He was honored and noted by famous men in Britain and Europe. He spent the rest of his life as the British Commissioner of Customs.

David Ricardo was born in 1772 England to a Jewish banker. He started working at age fourteen for his father, learning much about financial issues. A true businessman, he was wealthy and the head of his own business by the time he was in his twenties. Even though he became incredibly wealthy, he had ignored Smith’s Wealth of Nations until, while on vacation in Bath, England, he finally read it out of boredom. It turned out that their theories weren’t too far apart. While Smith’s was optimistic, Ricardo’s was considered pessimistic and complex. He spent his whole life, which could have been spent taking advantage of his wealth, contemplating, developing, and answering questions about our economy. He became a true gentleman of English intellectual society and the industrial revolution. He eventually wrote a treatise called “On the Principles of Political Economy and Taxation,” which included commentary on contemporary events, as well as Adam Smith. A couple years after this, he gained a seat in the House of Commons, where he spoke about free trade and political freedom. When he died in 1823, many admirers of his intellect and character attended his funeral. These men left important legacies that influenced our economic world. What were the pros and cons of their respective theories?

Adam Smith’s theory was that free trade was similar to an invisible hand that acted like a Natural Selector of businesses and entrepreneurs. If your idea, materials, prices and sale pitch weren’t effective as the next guy’s, then your attempt would be flattened mercilessly. However, if you had smart prices, cheap material, worthwhile products, and effective advertising, then you could very well become a millionaire. There was no order to this type of market, much to the fear of government officials, but it prospered on it’s own very well, which is the basic idea of free trade; freedom. As seen in the examples of Socialism and Communism, when the government controls money and property, everyone is forced to live in a lower class state of being. However, by producing what the people want with cheap materials at a lower price than your competitors, the invisible hand of Free Trade will favor you.

David Ricardo’s wealth is a perfect example of the success of Free Trade. By developing a knack for finances and the stock market, and using it to his advantage, he could have retired by the age of thirty. His theory, however brilliant, was never used because the people couldn’t understand it, and didn’t like it that much anyway. Basically, Ricardo thought that each country should play to its strengths, and work with other countries for the general good. For example, let’s look at the Gilligan’s Island analogy. Let’s say Gilligan and the skipper are by themselves on an island. Gilligan is characterized as a human jinx, while the skipper is competent and sufficient. They each can build huts and catch fish for dinner. However, the skipper is more efficient at building huts than catching fish. Meanwhile, Gilligan, even though he is clumsy, is more skilled at catching fish than building huts. According to Adam Smith, the invisible hand would flatten Gilligan and support the skipper. But, Ricardo insists that the skipper and Gilligan should work together so as to amass a greater collection of wealth, and therefore prosper. But the ultimate problem that faced Ricardo’s theory was the Protectionists, and their demands. Consider the Santa Claus analogy; if Santa can bring us things we already make ourselves for free, should we welcome Santa, or put him out of business permanently? According to the protectionists, we should shoot Santa, Rudolph and the sleigh out of the sky because he is infringing on our businesses. However, the Free Traders would welcome Santa and everything that was in his sleigh with open arms. The battle between free traders and protectionists has been ongoing for centuries.

Free Trade obviously works best, but which of these theories, both highly successful, would be pleasing in the Sight of God? The Bible tells us to “love our neighbors as ourselves” (Lev 19:18) and “in humility consider others better than yourself.” (Phil 2:3). If we are to keep with God’s teaching in everything, including economics, then Ricardo’s theory is more compassionate and therefore preferred. Unfortunately, many do not understand it and as a result, dismiss it. If economists had embraced it, trade wars, quotas and etc. would not litter the history of economics.

QuickQuiz::

a. Where in the Bible is the verse “be as innocent as doves, yet as wise as serpents”?
1. Matt 10:16
2. Lev. 19:18
3. Phil 2:3
4. Gen 1:1

b. What was the name of Smith and Ricardo’s books?
1. The adventures of Tom Sawyer and Huckleberry Finn
2. Wealth of Nations and On the principles of political economy and taxation
3. The Iliad and The Odyssey
4. Little Women and Jo’s Boys

c. What metaphor was used to describe Smith’s theory?
1. A large boulder
2. A small puddle
3. An invisible hand
4. A strong breeze

d. What analogy describes Ricardo’s theory?
1. The Santa Claus analogy
2. The Backseat Driver analogy
3. The Trojan Horse analogy
4. The Gilligan’s Island analogy

Answers: a- 1 b-2 c-3 d-4

Bibliography:

T. G. Buchholz. New Ideas from Dead Economists. New York. Penguin Books, 1999

Joseph J. Spengler. David Ricardo. World History. Nov. 22, 2003
http://www.kat.gr/kat/history/Eco/RicardoDavid.htm

Smith, A. World History. Nov 22, 2003
http://www.cpm.ehime-u.ac.jp/AkamacHomePage/Akamac_E-text_Links/Smith.html

Additional information about <http://hyperhistory.net/apwh/essays/comp/cw29econricardosmith.htm>

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